2019 Tax Law Changes - Federal vs. California

By: Bruce J Legawiec, CPA/Partner, Osborne Rincon CPAs

As many of you know, the Tax Cuts and Jobs Act (TCJA) resulted in many changes that will impact 2019 federal income tax filing. The question is – what does this mean on your 2019 California income tax return?

Below is a listing of several of the key changes for Federal Tax Law and the impact on California returns.

1. Qualified Business Income Deduction – One of the most significant new benefits on federal income tax returns is the 20% deduction related to flow-thru income (Schedule C, K-1’s from S corporations and LLC).  California does not conform to this deduction.

2. Changes to Itemized Deductions – Federal law has expanded the standard deduction for 2018 so that many taxpayers may end up utilizing the standard deduction in 2018 for federal purposes. California did not comply with federal limitations on itemized deductions, and therefore, it may still be more beneficial to itemize for California purposes even if one used the standard deduction on their federal tax return.  See some key differences below.

3. SALT Deduction Limitation – The much-publicized “SALT” deduction limitation for federal purposes now limits the federal deduction for essentially all taxes reported on Schedule A (itemized deductions) for state income tax, real estate tax and a portion of DMV fees to $10,000. California did not conform to this limitation. Therefore, if your property tax and DMV fees exceed $10,000, you will get the deduction for California purposes.

4. Mortgage Interest Deduction – TCJA limits the deduction for interest paid on up to $750,000 of acquisition indebtedness (for new contracts entered into after 2017) and repeals the deduction for home equity debt. California did not comply, so the interest deduction for California purposes may be greater than federal deduction.

5. Miscellaneous Itemized Deductions – TCJA totally repealed and eliminated these deductions – that included investment management fees, unreimbursed employee business expenses and tax prep fees to name a few.  California still allows these deductions, so be sure to compile these costs when submitting documents to have your tax return prepared.

6. Entertainment Expenses – These expenses are repealed and nondeductible for federal purposes. California still allows a deduction for business-related entertainment, for businesses and employees.

As always, an acute understanding of the tax law and good record-keeping are the best ways to minimize taxes.

For more information call Osborne Rincon CPAs at 760-777-9805